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Academy Industry Analysis Article

Why are USDT-Margined Derivatives Contracts Becoming so Popular?

2020.07.07 Robbie Liu
USDT- vs coin-margined swaps image

While the Bitcoin price has fluctuated considerably over the past few months, we have seen a steady increase — leading up to an all-time high — in the percentage of USDT-margined derivatives contracts being traded. At the same time, coin-margined contracts continue to lose market share. The margined currency — USDT or coin, meaning another cryptocurrency — refers to the currency in which the contracts are settled.  

This trend of rising number of USDT-margined contracts is evident when examining the OKEx’s perpetual contracts share of trading volume by type. In the skew chart below, BTC/USDT represents USDT-margined swaps and BTC/USD represents coin-margined swaps. The value of the former has sometimes exceeded that of the latter on a day-to-day basis while the average trading volume between the two has been very close.

Aggregated Daily Volume and Open Interest between BTC/USD (Swaps) and BTC/USDT (Swaps). Source: skew

In terms of trading depth, USDT-margined swaps have now caught up with coin-margined swaps — even exceeding them in the past week.

Trading Volume Percentage between BTC/USD Swaps and BTC/USDT Swaps from June 2 to June 17. Source: OKEx

USDT-margined contracts only went live on December 2019, when OKEx became the first exchange to have two types of contracts at the same time. In just more than half a year, the trading volume of USDT-margined contracts has grown rapidly — which also reflects current market conditions.

$5 million Bid/Offer Spread (%, daily avg) between BTC/USD Swaps and BTC/USDT Swaps from January 1 to June 17. For confidentiality, we have omitted the Y-axis. Source: OKEx

Coin-margined contracts vs USDT-margined contracts

A coin-margined contract is an inverse trading product — meaning crypto is purchased before the contract to deposit as collateral — that is settled based on the coin, or cryptocurrency, the trader selects. This means that if you are trading BTC/USD, your position will ultimately be settled in BTC. Traders also need to hold BTC as collateral if trading a BTC contract or ETH if trading in an ETH contract. 

A USDT-margined contract, on the other hand, is a linear derivative product quoted and settled in USDT — Tether’s stablecoin token that is pegged to the value of the U.S. dollar.

For inverse contracts, profit and loss, or P/L, is calculated in BTC, while linear contracts use USDT.

Inverse Nonlinear vs. Linear Payout. Source: Plotly

For many years, inverse futures contracts have been the most popular derivatives for trading cryptocurrencies. Until now, coin-margined quarterly futures have been the most traded and most liquid products on OKEx. 

In BTC trading, for example, quarterly futures (BTC-USD-200925) made up about 33% of the total trading volume in the last 24 hours. At the same time, USDT-margined perpetual swaps (BTC-USDT-SWAP) made up about 19% and exceeded coin-margined perpetual swaps (BTC-USD-SWAP) by 3%.

OKEx 24h BTC Futures & Swaps Volumes ($million) on July 7. Source: skew

Advantages of trading with USDT

As the price of Bitcoin continued to fall in the second half of 2019, accompanied by multiple rapid pumps and dumps, the market evidently became more risk-averse. This also coincided with stablecoins gaining popularity and seeing their use cases increase.

In a non-bullish environment or in periods of high volatility, USDT-margined contracts can help mitigate said volatility. They also allow traders to easily calculate their returns in fiat instead of BTC. 

Popular analyst and Decentrader founder FilbFilb explained to OKEx Insights:

"The problem with having BTC as the underlying asset, despite being an innovative swap product, means that there is an additional layer of risk management necessary to hedge the Bitcoin collateral. With new leverage-innovative products coming on line settling in USDT, some of that difficulty is eliminated for those wanting to primarily manage performance in USD." 

Trading with USDT, by far the largest stablecoin by market capitalization, has proven to be a good choice for volatile periods — such as the first half of 2020 — as it frees users from having to constantly think about hedging their crypto exposure.

Moreover, if traders take short positions, USDT-margined contracts could generate a better profit than coin-margined contracts when calculating profits and losses in fiat. OKEx previously illustrated this point in the following example:

However, in a bull market, the contango — a situation in which the futures price of an underlying asset is higher than the spot price — is very high. Coin-margined contracts will correspondingly generate more profits because the price of the collateral is rising.

In addition to a linear yield curve, USDT-margined contracts are also easier for some traders to trade, as they can open BTC, EOS, ETH and other contracts directly with USDT. This eliminates the losses incurred while undergoing conversions between coins. 

Traders can also open orders faster since  USDT-margined contracts eliminate the need to buy the underlying coins — which also cuts down on trading fees.

For those new to crypto trading, USDT-margined contracts may also feel more intuitive. For example, when a trader makes 100 USDT in profit, they can directly see that this profit is worth approximately $100 — since the value of 1 USDT is very close to 1 USD, most of the time. 

Given the relative stability, popularity and versatility of USDT, it is likely that the stablecoin’s use in derivatives trading will only continue to increase as the year progresses.


Disclaimer: This material should not be taken as the basis for making investment decisions, nor be construed as a recommendation to engage in investment transactions. Trading digital assets involve significant risk and can result in the loss of your invested capital. You should ensure that you fully understand the risk involved and take into consideration your level of experience, investment objectives and seek independent financial advice if necessary


OKEx Insights presents market analyses, in-depth features, original research & curated news from crypto professionals. Follow OKEx Insights on Twitter and Telegram.

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